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Walgreens Reviews Long-Term Goals

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Shares of Walgreens reached a 52-week high of $42.00 on Thursday, Feb 14 following its confab on long-term goals and strategic growth drivers during its analyst meeting in London.

Management recapitulated its long-term goals based on the assumption of obtaining 100% stake in Alliance Boots GmbH. The combined entity is expected to generate sales of at least $130 billion through fiscal 2016, reflecting a CAGR of roughly 16% (on the basis on fiscal 2012 revenues). Walgreens expects operating cash flow of $8 billion and adjusted operating income is envisaged in the range of $9-$9.5 billion by fiscal 2016.

Alliance Boots has cast its footprint in 25 nations across the globe with a thumping presence in Europe. The backdrop of profitable growth at Alliance Boots is another upside. Walgreens believes that the wholesale business of Alliance Boots should improve its supply-chain performance. These steps will help expand its business in several key regions and foster international growth. Accordingly, the company plans to realize acquisition synergies of approximately $1 billion within the fourth year of its partnership with Alliance Boots.

Walgreens discussed the major trends which are likely to have a positive impact on its financial results going forward. The company expects to benefit from demographic tailwinds and the generic wave in the pharmaceutical industry (a surge in generic utilization is expected in fiscal 2013). The Healthcare Reform will ensure access to care for another 30 million Americans. As healthcare expenses increase, total expenditure on drugs is envisaged to grow $35-$45 billion in the next three years in the U.S. In the end, management asserts that Walgreens is well positioned to drive growth going forward.

Our Take

We are encouraged with Walgreens’ review of its growth drivers, future business environment and long-term goals that boosted market sentiments as reflected in the bullish momentum of the stock.

Notably, the company is undertaking strategic initiatives to revive growth. While Walgreens’ long-term goals inspire confidence, the sales contraction is a looming concern. The tussle with CVS Caremark (CVS - Analyst Report) to gain market share is another cause of concern. However, things are looking up for the company as lingering bearishness can be lifted by improved execution of the growth strategies.

The estimate revision trend for fiscal 2013 for the stock reflects a glaring lack of clarity among analysts, which warrants a non-committal stance. Accordingly, the stock carries a Zacks Rank #3 (Hold). While we remain on the sidelines for this retail pharmacy chain, Rite Aid Corporation (RAD - Analyst Report) and PharMerica Corp (PMC - Snapshot Report), carrying a Zacks Rank #1 (Strong Buy) are expected to do well.

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